ACTION AGAINST JIM LING

IT was only a matter of time before Government trustbusters stopped talking about cracking down on conglomerates and actually did something. After repeated warnings, the Justice Department last week singled out one of the largest of those multi-industry companies, Ling-Temco-Vought, as its first major target. The trustbusters announced that by mid-April they intend to file suit to force LTV to dispose of its 63% holding in Jones & Laughlin Steel Corp.

The possibility of a suit against LTV has been under consideration since the last months of the Johnson Administration. Under its acquisitive founder, James J. Ling, Dallas-based LTV has grown since 1957 from a $4,000,000-a-year contracting company into the nation's 14th largest corporation, with sales last year of $2.8 billion. And its takeover last summer of Pittsburgh's J. & L.--whose sales of $900 million make it the nation's sixth largest steel producer --was the biggest conglomerate merger in history. J. & L. stock was selling for about $50 before the merger; Ling paid $85 a share, or $425 million, for a 63% holding. It is quite likely that he not only overpaid but overextended himself in the process.

Reciprocal Deals. The Administration's decision to press court action was in part a response to pressure from the established leaders of American business, many of whom have called for Government help to put down the upstart conglomerates. Worries about conglomerates have been especially strong among executives of the generally conservative and slow-moving steel industry. Quite a few have sought to make their companies less vulnerable to takeover by revamping accounting procedures to increase reported earnings.

On Capitol Hill, too, the conglomerates have come under increasing fire, and Congress is considering bills to end favorable tax treatment of the debentures that are often exchanged in conglomerate takeovers.* Rather than wait for such legislation, though, Attorney General John N. Mitchell elected to bring a test case under existing antitrust law.

Until now, the courts have interpreted that law to forbid most "horizontal" mergers between competitors and, to a lesser extent, "vertical" mergers with suppliers or customers. But the courts have said little about corporate takeovers of companies in entirely different fields. Mitchell's chief trustbuster, Richard McLaren, plans to invoke the Clayton Antitrust Act's Section Seven, which prohibits corporate acquisitions that substantially lessen competition. He may well cite the anti-competitive potential of reciprocal purchasing arrangements, under which LTV subsidiaries, which use large amounts of steel, might favor J. & L. rather than go to the marketplace for the best deal. Beyond that, McLaren may argue that competition is lessened by the sheer concentration of economic power that results from conglomerate mergers.

Defense Testimony. LTV vowed to defend itself vigorously. Its officers dismiss concern about reciprocal trading by noting that business among LTV's ten subsidiaries has traditionally amounted to less than 1% of company sales. As for the supposed dangers of economic concentration, no one has yet proved that industrial bigness necessarily means badness. On the contrary, the U.S. has prospered in world trade precisely because of the relatively large size and resources of its companies. The takeover of Jones & Laughlin by an aggressive outsider like Jim Ling could prove something of a welcome stimulus to the clubby steel manufacturers, who commonly follow the lead of the U.S. Steel Corp. in pricing and other policy matters. Even his critics acknowledge that Ling is certainly imaginative. One testimony to the productive efficiency of his company comes from the Government itself, which has made it the nation's seventh largest defense contractor.

Still, Ling is in trouble, and the Government's attempt to cut him down to size will only add to his problems. LTV has such heavy debts that the company faces difficulty in meeting the interest payments--about $45 million this year--out of current income. Partly as a result of the high payments, earnings are down. Excluding such special items as the sale of the LTV Tower in Dallas, profits in 1968 were off 18%, to $28 million; in the year's fourth quarter, they plunged 58%. In order to finance the takeover of J. & L., Ling had to negotiate short-term bank loans of $225 million; he has been meeting that obligation by selling off LTV assets, including part of its interest in Braniff Airways. Further sales of assets may be necessary to pay off LTV's total indebtedness of $900 million.

Tender Offer. One way of easing the load would be for LTV to increase its holdings in J. & L. from 63% to 81%. Under federal law, ownership of at least 80% is necessary before dividends can be freely transferred from one company to another on a tax-free basis. If LTV owned enough J. & L. stock, it would be able to collect about $20 million in dividends--a windfall that would help Ling pay his interest and retire some short-term debt. Thus Ling made a tender offer that expires this week. In exchange for more J. & L. stock, he will give a complicated package of LTV securities, including debentures and warrants. Last week the trustbusters threatened to seek an injunction against the tender offer, but the company negotiated an unusual pretrial compromise. Under its terms, LTV will be able to buy up additional stock. Should the Government win its case, however, LTV promised to divest itself entirely of J. & L. shares. Meanwhile, Ling and two of his representatives will resign from J. & L.'s 16-man board.

With a court test ahead that could drag on for two years or more, LTV stock became increasingly unpopular. LTV common, which hit a high of $135 last May, closed last week at $59. And Jones & Laughlin dropped so much that Ling's $425 million investment was, for the moment at least, worth only $290 million.

* The Nixon Administration last week also introduced legislation to restrict "one-bank holding companies." To get around legal complications involved in bank diversification, some 80 major banks have reorganized in such a way that the bank becomes a subsidiary of a holding company, which is then free to venture into insurance, computer leasing and similar fields.

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